The blog of the 'There is a Better Way' campaign by STUC staff about policy issues that are, or should be, in the news and guest contributors on issues of social justice. Written from a STUC perspective, contributions will often cover areas where there is yet no settled STUC policy and go into areas in more detail than our formal decisions. We welcome debate and we don’t expect everyone to agree with us, but we will remove any comments that are offensive, irrelevant or otherwise annoy.

It’s a disappointing
paper. Some fundamental issues are dealt with in a very flimsy manner or,
worse, ignored altogether. The paper is imbued with a worrying naivety (‘in the wake of the crisis, the attitudes of
consumers, UK and EU regulators and the banks themselves have changed’) and
a level of optimism about the benefits of greater competition that might kindly
be described as unjustified.

The STUC will
publish a full response in due course but here are my early thoughts on some
specific issues:

1 Key sector?

The strategy
implicitly accepts the approach whereby banking, as part of ‘Financial and
Business Services’ is treated a priority or ‘growth’ sector by the Scottish
Government. Publication of the banking strategy should have provided an
opportunity to state what has been apparent since 2007: chasing growth in
banking as an end in itself is a mugs game.

A too large banking
sector absorbs resources (e.g. engineers, mathematicians etc) that could be
more productively deployed elsewhere. It contributes to higher inequality,
destabilises the wider economy and exerts a degree of political influence that
cannot be reconciled with a healthy democracy.

Debating whether an
independent Scotland could have coped with the crisis of 2008 is ultimately
pretty pointless. The pressing issue is surely what needs to be done to avoid
future crises under any constitutional scenario.This requires Government to measure success
in banking not by the sector’s output but whether banks are fulfilling their
fundamental purpose of allocating capital efficiently.

2 Too big to fail, too complex to manage

The strategy doesn’t
address issues of scale which, to put it mildly, is something of an oversight.
As was surely proved beyond all reasonable doubt by the crisis, large financial
conglomerates are very dangerous entities. They enjoy an implicit public subsidy which hands them a major competitive advantage over smaller players. (Again)
they hoover up resources and exert a nefarious political influence. Boards are
unwilling or unable to exert effective oversight. Executives don’t understand
the businesses they purport to run.

So here was an
opportunity to state categorically that serious structural as well as
regulatory change is required to make the system safer and more efficient. The
opportunity was flunked.

3 Competition

Scotland’s banking
sector is highly concentrated; more so since the crisis enforced consolidation.
Therefore support for greater competition has never been stronger. Proposals
include liberalising entry conditions and reducing switching costs. Interestingly
other barriers to entry such as the remuneration of executives (the strategy
doesn’t address remuneration) are not mentioned.

The recent LSE Growth
Commission (UK) report argued that increased competition would have a variety of benefits:

"It would encourage banks to seek out profitable lending
opportunities more assiduously. It could also stimulate relationship lending as
retail banks focus on more mundane finance rather than ‘casino’ activities”.

But how well does
the competitive mechanism function in the retail banking market and would more
players necessarily lead to the benefits described above? Many have their
doubts. Here’s the economist Roger Bootle (no socialist he) in ‘The Trouble with Markets’ his excellent book on the crisis:

“At the retail end of financial services,
despite the appearance given of a large number of providers, because of
asymmetries of information and opacity in charging structures, most services
are provided in a non-competitive way, again, with the result that the
interests of the ultimate customer – the retail client – are not properly
reflected through the system. Across much of the financial sector there is a
tendency to regard retail customers as helpless victims, there to be exploited,
rather than as business partners from the satisfaction of whose needs derives
the justification for profit. More milchcow than market”.

If ‘asymmetries of information and opacity in
charging structures’ persist then the supposed benefits of greater
competition will not be realised even if more players enter the market.

4 Workers

The strategy
includes a section on ‘professionalism and standards’ which, as the title
suggests, is very tightly focused on the qualifications and professional
accreditation of senior staff.

There is no mention
of the retail counter staff or call sector worker; workers who in the recent
past have suffered redundancy or the intensification of performance management
regimes. Banks are no longer a good place to work. The golden rule of Scottish
and UK economic development policymaking is once again strictly adhered to: do
or say nothing which might possibly be perceived as infringing on managerial
prerogative.

5 Restoring Trust

Consider this:

“The banks want to change the public’s often negative
perception of them and they recognise that the only way to do that is to prove
to their customers that the desire to change is genuine and that it is for the
long term. That is a hugely important step and one that deserves to be
supported”.

I can only say that
that this is not the world in which I live.

6 Scottish Business Development Bank

The strategy
includes a laudable proposal for the Scottish Investment Bank to evolve into a
Scottish Business Development Bank. Although not presented in these terms, this
is clearly an attempt to overcome a long standing and extremely serious
structural problem in the Scottish economy: the failure of the financial sector
to support productive, growing and innovative businesses with patient and
committed capital.

But the proposal is
messy and confused, lacking in detail and ambition. It fails to mention that
innovation is currently heavily penalised by banks (for perceived higher risk)
and that supporting such activity should be the primary purpose of such an
institution. Another opportunity missed. Give us something like this instead?

7 Diversity

On the day that the
full extent of the Cooperative Bank’s problems were revealed, it’s good that
the strategy promotes the value of alternative business models and different
forms of ownership. The expanded role that credit unions could play in
providing services to customers that banks have hitherto refused to service is
also highlighted.

But the strategy has
nothing substantial to say about how a greater role for such institutions might
be achieved. This isn’t something that can be wished into happening.

This leads on to the
final issue: what can be achieved at Scottish level under current or new
constitutional arrangements? The strategy states that ‘independence would allow Scotland access to the necessary levers to
encourage a responsible, sustainable banking sector that better meet the needs
of the Scottish people, that enhances Scotland’s competitive advantage and that
better enables us to address the economic challenges facing us’.

At the moment
nothing can be achieved at Scottish level to reform banking. But it’s not
immediately clear to me that the macroeconomic framework proposed by the FiscalCommission would provide any additional levers in this respect under
independence. Scotland and the UK would be in a banking union with whole UK
institutions in charge of oversight. It remains to be seen whether other
important responsibilities – e.g. corporate governance – will be exercised on a
whole UK basis.

If nothing else,
maybe publication of this strategy will provoke a debate about the future of
banking in Scotland that might force the Scottish Government to address these
issues head on in the white paper if not before. I hope so.

About Me

The STUC is Scotland's Trade Union centre.
Our purpose is to co-ordinate, develop and articulate the views and policies of the trade union movement in Scotland and, through the creation of real social partnership, to promote: trade unionism; equality and social justice; the creation and maintenance of high quality jobs; and the public sector delivery of services.
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